Earlier this week Moody’s downgraded the covered bond ratings of six Turkish banks – Akbank, Denizbank, Turkiye Garanti Bankasi, Sekerbank, Vakifbank and Yapi ve Kredi Bankasi to Baa1 according to a press release from the ratings agency.
The release added that Vakifbank’s covered bond rating remains under review for a downgrade, due to the increased over-collateralisation needed to maintain the Baa1 rating (22.5% from 20%).
The downgrade follows the lowering of the sovereign’s local-currency bond ceiling to Baa1 from A3.
Despite their typical resilience, events in recent months have impacted on Turkish dollar-denominated covered bonds.
The current benchmark covered bond, a US$500mn note issued by Vakifbank in April this year, has noticeably shifted.
“If you look at the spreads, they did quite well following the launch, but after the coup attempt and the uncertainty in the Turkish markets spreads have widened significantly. They have tightened recently, but are still well above the level at which the bond was issued,” said Joost Beaumont, a senior fixed income strategist at ABN AMRO.
According to data from Bloomberg, the spread of Vakifbank’s covered bond has seen a 110bp shift from 230bp to 340bp. This compares favourably to the spreads of the Bank’s senior unsecured notes, which have shifted 194bp from 256bp to 450bp, highlighting the stability of Turkish covered bonds.
“There is less of a change in the Bank’s covered bond, but there is a higher correlation than you would normally see between secured and unsecured bank bonds.”
Although the shift in the spreads of Vakifbank’s covered bond suggests that investors are either fleeing the bond or are simply not buying, the returns on Turkish covered bonds are likely the most attractive investors could find.
Poland’s PKO Bank Hipoteczny has announced it will go on a roadshow for a Euro-denominated covered bond, which is provisionally rated (P)Aa3 by Moody’s, and Singapore’s DBS bank is also looking at a benchmark Euro-denominated covered bond.
“Investors may consider PKO’s covered bond, but it is not a perfect substitute, whilst DBS Bank’s upcoming offering will provide substantially lower returns than Vakifbank’s bond,” Beaumont noted.
He added that despite a widening in the spreads of Vakifbank’s bond, it was still attractive, and it was likely that many investors would continue to hold on to it.
In addition, the increased yield on Turkish covered bonds is likely to attract yield-hungry investors form elsewhere.
“I do not rule out covered bonds attracting investors who do not traditionally cover Turkey because of the pricing and the structure (collateralised and dual-recourse), and opportunistic investors are likely to make a move on such instruments.”